Silicon Valley may have abandoned its favorite shoe company, but allbirds (bird 0.61%) We’re not abandoning Silicon Valley. The venture capital-backed direct-to-consumer shoe company was once worth $4 billion. The company sold its shoe brand in March for $39 million, less than 1% of that amount.
But Allbirds is like a phoenix. From the ashes of the eco-friendly shoe business, it is emerging as an artificial intelligence (AI) company. With a $50 million financing agreement, the company will coreweave (CRWV +6.68%) or nevius group (NBIS +11.79%). And it has a fancy new name: NewBird AI.
When the company made this announcement, Allbird’s stock price went up in flames, increasing in value by nearly seven times. And while the stock price has fallen significantly since the announcement and has stabilized, it’s still up about 167% from its pre-pivot price. The market reaction to this news should cause some concern for AI stock investors, especially those who buy shares of companies in NewBird’s family. Not because new competitors are a bigger threat to more established AI businesses, but because it says a lot about how investors value AI businesses.
Image source: Getty Images.
I’ve seen this story before.
This isn’t the first time a struggling company has pivoted to a trendy business that has nothing to do with what it’s done in the past. Allbird’s rebranding is reminiscent of how some companies acted during two other key moments in recent market history.
In 2017, Bitcoin It was a boom. Cryptocurrency markets and anything related to blockchain was attracting a large amount of capital. Companies were considering how to incorporate blockchain technology into their operations to improve security and speed. Then, a struggling iced tea company decided it could invest in blockchain as well. This is how a microcap beverage company called Long Island Iced Tea transformed into Long Blockchain.
Following this announcement, the stock price skyrocketed and remained elevated for some time. However, this announcement coincided with the peak of Bitcoin’s business cycle. Over the next year, cryptocurrencies will lose 75% of their value. Meanwhile, Long Blockchain was delisted. Nasdaqwas accused of misleading investors about its intentions to invest in blockchain technology.
Bitcoin price data by YCharts.
You may also remember the dot-com bubble, when dozens of companies chose to add “.com” or “.net” to their names and the market rewarded them for doing so. Some people changed their names so completely that they no longer knew what they were doing or who they once were. Those shares were rewarded even more. Of course, most of these stocks lost nearly all (if not all) of their value when the dot-com bubble burst.
NewBird AI’s debut does not necessarily signal that this phase of the AI trend has peaked or will meet a similar fate, but it should alert investors. And be especially careful when it comes to CoreWeave, Nebius Group, and other companies in the neocloud space.
Big challenges for neo-cloud companies
Investor enthusiasm for Allbirds’ transformation is a sign that most investors do not see significant barriers to entry into neocloud businesses. This is further evidence that CoreWeave and Nebius Group do not have significant competitive advantages that could generate high profits in the long term. They currently sell a commodity-like product that is in incredible demand, but that could change.
Additionally, these businesses are highly leveraged and take on large amounts of debt to finance data center construction. They work with the world’s largest, best-capitalized, cash-flowing companies, reducing risk, but their valuations are based on the assumption that the return on invested capital exceeds the cost of capital. This can be difficult to achieve if pricing power is undermined by a lack of product differentiation.
If Allbirds’ announcement is anything like a harbinger of the peak cycle seen from the late 1990s to 2017, spending on artificial intelligence could be headed for a downturn. If that happens, neo-cloud companies could find themselves in an unstable situation and their stock prices could plummet.
